There are many ways to get to a $100,000 Tax-Free Savings Account (TFSA). The way I’m about to discuss is a simple method with below-average risk, which should help you avoid common TFSA mistakes.
Before I get to what to invest in your TFSA, here’s the general idea.
The gist of our strategy to get to a $100,000 TFSA
Firstly, the TFSA is a savings tool before it’s an investment tool. So, you’ve got to put money in regularly to get your TFSA growing.
Secondly, because we can’t use capital losses to offset capital gains in TFSAs, we’re going to take reduced risk in the account. Specifically, we aim to buy quality stocks that have durable profitability — but only when they’re trading at fair or better valuations.
Thirdly, we want to hold largely proven dividend-growth stocks that offer decent dividend yields of 3-5% (at least initially). This is because we’re pretty late in a bull market (more than 10 years in since the low of the last market crash).
The defensive stance will give us a positive return from decent dividends even in a market downturn. The extra capital from the dividends can be reinvested for more shares at such a time.
Fourthly, we’re aiming for long-term returns of 10% per year, which is very reasonable for blue-chip dividend-growth stocks that offer yields in the range of 3-5%.
Some people think stock investing is gambling. It can be, but it doesn’t have to be. Stock investing won’t be gambling if it’s a sure win. There is a range of concepts you can apply to increase your odds of winning.
Here are some useful tips that can make stock investing a lucrative endeavour for you.
Don’t Lose Money
This is easier said than done. To avoid losing money when you invest in stocks, first familiarize yourself with the topics around what makes a good business, fundamental analysis, and valuing a company.
I find learning about technical analysis helps. But identifying great businesses and trying not to overpay for them comes first.
Many investors share their investing strategies or why they buy or sell a stock through blogs or forums.
For instance, my friend recently invited me to join a Facebook (NASDAQ:FB) group, which had a focus on dividend investing. Of course, if you have more time on your hands, pick up a bunch of books about specific investing topics from the library or Amazon (NASDAQ:AMZN).
A good book for new investors is The Single Best Investment by Lowell Miller with a focus on Creating Wealth with Dividend Growth.
You can follow the people or groups that share stock investing ideas or strategies that interest you and learn over time.
Soon, you’ll be itching to apply your knowledge. If you want a sure-fire way to not lose money, experiment with a virtual account. I bank with Bank of Nova Scotia (TSX:BNS)(NYSE:BNS).
It offers a virtual trading account in which I can buy or sell stocks on the Canadian and U.S. exchanges like in a real account, but it’s for practice only. It starts you off with $100,000-200,000 of virtual money.
Key Takeaway: Preserve your capital. You need money to invest to make you more money.
Business Valuation Changes
In the previous section, I mentioned about valuing a company. If you’ve done some reading on stock investing already, you’ve probably heard that you don’t want to overpay for even the best of companies, including Johnson & Johnson (NYSE:JNJ), one of only two AAA-rated companies.
The most common valuation metric of a stock is the price-to-earnings ratio (P/E).
As of writing, Facebook trades at $162 per share and in 2018 it reported earnings per share of $7.57. So, its P/E based on trailing-12-month earnings is 21.4. However, its P/E was close to 60 when it first started trading. Facebook’s 2019 earnings are estimated to remain stable compared to 2018’s. That’s why the stock is trading at a lower P/E. Longer term, Facebook is currently estimated to increase its earnings per share by more than 15% per year.
There are other things that can affect a business’ valuation, such as the debt levels of a company. If company A and company B are the same except that A has more debt than B, A will have a lower price tag than B.
Key Takeaway: Business valuations change as the underlying businesses change. Typically, lower anticipated earnings growth (or worse, negative earnings growth or a net loss) will cause stocks’ valuations to drop like a rock.
Bank of Nova Scotia is Canada’s most international bank with a focus on the Pacific Alliance countries.
In the past 10 years, the bank’s earnings-per-share growth versus its share count growth was pretty poor compared to its peers.
The stock has underperformed its peers but has outperformed the market.
Scotiabank’s dividend yield of 4.7% is safe, and you can expect stable dividend growth from the bank.
As the third-largest Canadian bank by market cap, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) or Scotiabank is often viewed as a blue-chip dividend growth stock. However, it may not be as great an investment as you think.
First, here’s an overview of the bank.
Business Overview of Bank of Nova Scotia
Scotiabank is Canada’s most international bank, but it still generates about half of its earnings from Canada. Its Canadian Banking segment is secure and generated the highest return on equity (“ROE”) of 22.7% in fiscal 2018 compared to the ROE of 14.4% and 16%, respectively, for its International Banking segment and its Global Banking and Markets segment. The overall ROE was decent at 14.9%.